Sheepskin nose bands have no physical effect if put on correctly. Otherwise, if put on too tightly, then yes, I would consider that cruel. Those who don't know the right fitting have no business putting it on, that is unacceptable to me. With that obviously using it wrong would not good be horsemanship, which includes using it to try to dominate a horse by having it too tight. Nosebands (any type) always go under the bridle’s headpiece and slotting through the end loops of the brow band to keep in place. Rule of thumb is to be able to slide a finger all round the straps between the leather and the horse’s head like this it is effective whilst still being comfortable and not interfering with the horses breathing.
UPDATE: Yes, of course, it would be best to find out why the horse is doing this, and yes, sometimes the horse feels more comfortable as you state. However, many horses do have bad head position behaviors. Each horse/race horse is different as you know. First, I would look into why the horse is doing this. Second, there are many many reasons why a horse holds it's head high. Horses usually have to be taught good head position. A lot of times it is about learned behavior, and is reason I said using the noseband correctly is OK. My reason for stating physical effect was regarding pain/cruelty, there's no pain when using it correctly, therefore is acceptable. It's used in training; a good trainer uses cues and the correct equipment, not pain nowadays. I cannot speak for everyone, as this is certainly not a cookie cutter answer. Many "here" use a sheepskin nosebands aka shadow roll for the high head purpose because when the horse realizes he can't see where he or she is going it often makes them stop that habit! Nosebands of these types are generally used on horses that carry their heads awkwardly. When they stick their heads in the air, the noseband will actually prevent them from seeing in front of them, so the horse then puts his head down so he can see. Again, all horses are different. Believe me a horse is not going to do anything it doesn't want to do if it involves pain, at least the racers that I've dealt with in my life. Holding his or her head high might be that what makes the horse comfortable, however, in most cases not the rider. Martingale strap(s) are used too, but we seem to be on the noseband topic. Martingale strap(s) is connected to noseband. I would have to work with the horse to see if it's something that needs to be changed or addressed. Sometimes it's not necessary. I prefer to work with a horse natural way/ability first (if possible) rather then to change it anytime.